A significant proportion of commercial properties in the UK are underinsured, leaving businesses vulnerable to financial loss in the event of a claim, according to RebuildCostAssessment.com.

The company’s data suggests that eight in 10 commercial properties have insurance cover below their true rebuild cost, with policyholders often relying on market value rather than reinstatement value when setting their insurance levels.

According to Johnny Thomson, strategic planning director at RebuildCostAssessment.com, this widespread underinsurance can have serious financial implications for businesses.

“Most businesses are insuring their properties based on market value rather than the true cost of rebuilding,” he said. “This means that when a claim is made, many policyholders face significant shortfalls, sometimes running into the millions.”

BUSINESSES EXPOSED

The company’s analysis, which it says was based on hundreds of thousands of property assessments, indicates that underinsured properties are, on average, covered for just two-thirds of their actual rebuild cost.

For example, a commercial property that would require £10 million to rebuild might only be insured for £6.3 million, leaving a potential £3.7 million gap for the business to cover in the event of a total loss.

Thomson also highlighted the impact of the ‘average clause’ found in most insurance policies, which proportionally reduces the amount paid out for a claim if the sum insured is too low.

“A business making a £10,000 claim on a property that is only insured for two-thirds of its true value might only receive £6,300, which could significantly affect its financial recovery,” he said.

FACTORS WHICH ARE WORSENING THE PROBLEM

Rising construction costs have exacerbated the issue. Inflation in 2022 alone pushed construction costs up by 25%, while the pandemic saw some material prices increase sevenfold.

“A property that was adequately insured in 2019 could now be dramatically underinsured, leaving businesses exposed to risks they may not even be aware of,” said Thomson.

One of the main reasons for underinsurance, Thomson explained, is the way commercial property insurance is arranged.

“Policyholders are asked how much they want to insure their building for—it’s their responsibility to provide this figure. The result is often guesswork, leading to estimates that fall far below the true rebuild cost,” he said.

Comparing the process to booking a flight, Thomson explained that businesses could end up significantly short on cover if they do not use precise valuations.

“Imagine trying to book a trip to the south of France, but instead of selecting a destination, you are asked how many miles you want to fly. Without precise knowledge, you could end up far from where you need to be. Insurance works similarly—if a business doesn’t know the accurate rebuild cost, they could be left significantly short when they need cover the most.”

THE ROLE OF REBUILD ASSESSMENTS

To mitigate underinsurance, Thomson urged businesses to work closely with their brokers and obtain a professional rebuild cost assessment.

“Good brokers play a crucial role in ensuring businesses have adequate coverage,” he said. “Having an up-to-date and accurate valuation is the only way to ensure that businesses are fully protected against potential financial disaster.”

As economic pressures continue, Thomson emphasised the importance of financial resilience.

“With rising costs and economic uncertainty, businesses need to ensure they can withstand unexpected losses. The last thing any business needs is to discover too late that they are dramatically underinsured.”